What fees are associated with target-date funds?

Target-date funds have two types of fees. The first type of fee is paid to the company managing the fund and selecting the underlying investments. The second type of fee is paid to the managers of the underlying investments themselves. For example, most mutual fund companies such as American Funds employ one manager who is responsible for allocating a target-date fund across a portfolio of individual stock and bond funds. Each stock and bond fund, however, is also managed independently. Even though there are essentially two types of fees being paid, the investor only sees one aggregate fee on his statement, often called something like "acquired fund fees and expenses."

Fees for Target-Date Funds Have Been Dropping

Because of the competitive nature of the target-date fund market, as of 2015, fees have been dropping every year for almost a decade. This trend has been particularly exacerbated because of the newfound prevalence of target-date funds inside company 401(k) plans, and because of relentless cost-cutting by companies such as Vanguard that use index funds instead of active managers.

Even though target-date funds effectively charge two types of fees, the overall fee investors pay is usually much lower than the net fee they pay if they employ a financial advisor and also pay the individual fund fees. Vanguard's 2050 target-date fund, for example, charges only 0.18% to investors. Particularly inside of company 401(k) plans, target-date fund fees can be even lower than those offered to individual investors because fund providers are very attracted to the potential economies of scale.